August 10, 2006

British Terror attempt foiled

Silver down 46 cents on the day. Open:12.48 High:12.65 Low:12.02 Close:12.02A new 2-month high was set this morning, and then a pretty convincing sell-off carried through the rest of the day. Bull wave is now 8 weeks old-and the sub-wave is 3 weeks old.

The attempt by terrorists to blow up airlines over the Atlantic ocean was foiled this morning by British Police. After an initial scare to markets and boost to the precious metals, both markets turned around and went the other direction(Equities up, PMs down.) The magnitude of the sell-off in Gold and Silver today adds to my impression that there is weakness in the PMs. Also, insider knowledge about a terrorist scare may have been behind yesterday's otherwise confusing run-up in prices in PMs. Today's action leads me to resume my neutral/bearish stance on silver.

My newest theory about the Fed's meeting on Tuesday is that it was manufactured in an attempt to save the dollar. They paused-which was already priced into the markets-and then they made an opaque statement threatening further rate hikes in the future. This uncertainty turns into strength for the dollar since future rate hikes would be dollar positive. Of course "saving the dollar" is a relative thing since commodity prices will reflect actual money supply in the long run and will give a truer measure of the dollar's power. For now though, it might be possible to keep the dollar on par with other currencies and to simultaneously increase money supply.

My theory for the next couple of months is that consumer credit will be fairly easy to come by and that the Fed will monetize a fair amount in Open-Market operations. The stock market will sell off but its downside will be limited by the Plunge Protection Team. And finally, commodities will complete their correction that started in May. Note that the commodity index failed to break through chart resistance today. The bond market is the wild card. Look for Crude Oil to correct to about 66 dollars. Silver corrects to 10.50 area. Gold corrects to 575, possible all the way back to 540. CRB index back to 370. The stock market is harder to call but I think 1140 is likely and 1050 is possible. If the stock market does correct that far, I think it will do so violently and that a major intervention will be needed like 1987. The Bond market is the tricky bit and the potential crisis. More on that another time.

I reiterate my position to be neutral or short on silver. If you are short, you can now use today's high + 2 cents as a stop and 10.70 as a targer. If you are neutral, look for buying opportunities around 10.70. If you are long, good luck to you.